Saturday, November 20, 2004

Get your phone bills out -- and get ready to claim a tax refund for your share of $9 billion of illegally collected telephone taxes.

[Update: The IRS has now lost ten cases on this issue -- including at three different federal Courts of Appeals -- and won none. See citations at the bottom.]

The federal telephone excise tax -- enacted as a temporary measure two centuries back to help finance the Spanish-American war -- may finally in large part be meeting its demise as the result of evolving markets, bureaucratic punting, and Congressional bungling.

So go check your phone bill -- depending on the kind of service plan you have, you may be able to claim tax refunds for three years back.

The short version of the story: The Internal Revenue Code has long placed an excise tax on long-distance phone service, specifically defining such service as that for which "there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication". IRC Sec. 4252(b)(1)

But the simple fact is that in the U.S. today most long distance charges do not vary by distance, and many don't vary by time either. Most businesses pay a flat monthly rate, or are billed by calling time but not distance. Individuals too have all kinds of plans available to them that don't bill using the required combination of time and distance -- flat rate, time (not distance), "friends & family" variations, and so on.

Now it's a basic principle of legislative construction that tax law, like criminal law, is read literally -- it says what it means and means what it says. Moreover, the Supreme Court's position is that "if doubt exists as to the construction of a taxing statute, the doubt should be resolved in favor of the taxpayer." Hassett v. Welch, 303 US 303.

So on the face of things it's pretty clear -- the IRS has been collecting a lot of tax on phone service that it isn't entitled to.

And in the last year companies have begun asking for that tax back ... and courts have been giving it to them.

In the lead case OfficeMax last year sued the IRS for more than $280,000. In January of this year a federal district court in Ohio granted the refund -- and gave the IRS a lecture on statutory interpretation focusing on how the word "and", in a phrase such as "time and distance", does not mean "or".

In just the last two months, Amtrak was granted a $86,000 refund from a court in D.C., and a firm called Fortis Inc. has been granted a refund of more than $400,000 from a court in New York. Both decisions were by summary judgment -- meaning the judge said the IRS didn't even have a case worth bringing to trial.

So the floodgates may be opening.

Nonetheless, the IRS says it's not going to be paying any refunds soon, it is appealing these cases and hopes to win in the higher courts. Things don't look so good for it up there either, but with more than $9 billion (and rising) estimated as being at stake, it has reason to fight on.

As to your phone bill, what should you do if it looks like your long-distance calls shouldn't be taxed, but the amount of bucks involved don't justify suing the IRS personally?

Consider filing a "protective refund" claim for the taxes you've paid three years back. The IRS won't pay it yet, but it will put you on record as asking for a refund which will keep your potential claim for these taxes from expiring with the statute of limitations as time passes. Then you let the big boys fight it out -- in the end, the IRS will have to follow what the courts decide. Especially if your phone charges are on the scale of those incurred by a small business (or more) this could be a good idea. Reportedly, the IRS is beginning to see a whole lot of these protective claims.

Another question is, how did this situation ever arise? After all, it's not like innovations in long-distance billing just started yesterday, as a big surprise -- the market has been visibly evolving in this direction for decades, and there was plenty of time for the IRS and Congress to easily head off the current situation had they wanted to.

Instead, sources dealing with these cases say the IRS initially resorted to paying refunds to companies that asked for them on condition that they not tell anybody -- a sort of tax refund "hush money". Well that was sure to work!

Now this issue is not going to be so easy to deal with. The lure of $9 billion (and rising) of tax refunds sitting there for the taking has motivated lobbyists, tax lawyers and business interests in a big way. Moreover, with the telecoms industry rapidly expanding and evolving, and the many open regulatory questions facing it -- such as the taxation of internet protocol voice communication, long-distance and otherwise -- this formerly mundane tax may now wind up as a multi-billion dollar issue in the political mix of fundamental regulatory reform.

The backstory of how the IRS and Congress let this all occur may I think be the subject of a future post.

Personally, I find it helps throw light on how government really works, as opposed to how people like to imagine it works -- and also on practical policy questions, such as: Do we really want a Congress and government bureaucracy that can't even keep up with telephone billing changes taking over all of national health care?

So, perhaps more on this later.

Addendum for those who have expressed more interest: I'm a lawyer but you don't know that. So for more thorough legal analysis look to the professional article(.pdf) that first brought this subject to the public eye.

The three cases mentioned above (all decided after it was published) are: Office Max v US, 309 F. Supp. 2d 984 (N.D. Ohio 2004); Fortis Inc. v. US, No. 03 Civ. 5137 (JGK) (S.D.N.Y. 9/16/04); and National Railroad Passenger Corp. v. US, No. 03-431 (RMC) (D. D.C. 9/20/04).
I haven't looked to see if the texts of the decisions are online -- while the federal appeals courts are all online these days, most of the district courts aren't as yet. But if you're serious about claiming a refund, any tax professional can look them up for you easily enough through the professional tax reporting services, and then help you take it from there.

Go get 'em, tigers!

Update: We have another winner! Reese Brothers Inc. v US, No. 03-745 , DC WD Penn., refund of $345,351.53, on summary judgment once again.

Update: IRS loses for fifth time on long distance ... loses on toll-free "inbound 800" service too ... and Congress begins to notice ... details.

Update: The IRS now has lost in three federal Courts of Appeals -- American Bankers Insurance v U.S. (.pdf), No. 04-10720, USCA 11, which overturned the IRS's sole trial court victory; OfficeMax, Inc. v. U.S. (.pdf) , No 04-4009, USCA 6; and National Railroad Passenger Corporation (.pdf) , No. 04-5421, DC Circuit.